[House Report 115-1075]
[From the U.S. Government Publishing Office]


115th Congress     }                                 {        Report
                        HOUSE OF REPRESENTATIVES
 2d Session        }                                 {       115-1075

======================================================================



 
              SMALL BUSINESS AUDIT CORRECTION ACT OF 2018

                                _______
                                

 December 12, 2018.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 6021]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 6021) to amend the Sarbanes-Oxley Act of 2002 to 
exclude privately held, non-custody brokers and dealers that 
are in good standing from certain requirements under title I of 
that Act, and for other purposes, having considered the same, 
report favorably thereon with amendments and recommend that the 
bill as amended do pass.
    The amendments are as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Small Business Audit Correction Act of 
2018''.

SEC. 2. EXEMPTION.

  (a) Amendments to Title I of the Sarbanes-Oxley Act of 2002.--Section 
110 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7220) is amended--
          (1) in paragraph (3), by inserting ``, except that the term 
        does not include a non-custody broker or dealer that is 
        privately held and in good standing'' after ``registered public 
        accounting firm'';
          (2) in paragraph (4), by inserting ``, except that the term 
        does not include a non-custody broker or dealer that is 
        privately held and in good standing'' after ``registered public 
        accounting firm'';
          (3) by redesignating paragraphs (5) and (6) as paragraphs (8) 
        and (9), respectively; and
          (4) by inserting after paragraph (4) the following:
          ``(5) In good standing.--The term `in good standing' means, 
        with respect to a broker or dealer (as those terms are defined 
        in section 3(a) of the Securities Exchange Act of 1934 (15 
        U.S.C. 78c(a))), that, as of the last day of the most recently 
        completed fiscal year of the broker or dealer, as applicable, 
        the broker or dealer--
                  ``(A) was registered with the Commission;
                  ``(B) was a member of a registered securities 
                association (as defined under section 15A of the 
                Securities Exchange Act of 1934 (15 U.S.C. 78o-3));
                  ``(C) was compliant with the minimum dollar net 
                capital requirements under section 240.15c3-1 of title 
                17, Code of Federal Regulations, or any successor 
                regulation;
                  ``(D) had not, during the 10-year period preceding 
                that date, been convicted of a felony under Federal or 
                State law;
                  ``(E) does not have an associated person (as that 
                term is defined in section 3(a) of the Securities 
                Exchange Act of 1934 (15 U.S.C. 78c(a))) who, during 
                the 10-year period preceding that date, was convicted 
                of a felony under Federal or State laws for fraudulent 
                conduct; and
                  ``(F) was not, as provided by section 3(a)(39) of the 
                Securities Exchange Act of 1934 (15 U.S.C. 78c(a))--
                          ``(i) expelled or suspended from membership 
                        or participation in any self-regulatory 
                        organization (as provided in section 3(a)(26) 
                        of the Securities Exchange Act of 1934 (15 
                        U.S.C. 78c(a)(26))) or a registered futures 
                        association (as provided in section 17 of the 
                        Commodity Exchange Act (7 U.S.C. 21));
                          ``(ii) subject to an order of the Commission, 
                        or other appropriate regulatory agency, 
                        denying, suspending, or revoking its 
                        registration as any regulated entity; or
                          ``(iii) subject to an order of the Commodity 
                        Futures Trading Commission, or other 
                        appropriate regulatory agency, denying, 
                        suspending, or revoking its registration under 
                        the Commodity Exchange Act (7 U.S.C. 1 et seq.) 
                        or its authority to engage in any transactions.
          ``(6) Non-custody broker or dealer.--The term `non-custody 
        broker or dealer' means a broker or dealer (as those terms are 
        defined in section 3(a) of the Securities Exchange Act of 1934 
        (15 U.S.C. 78c(a))), as applicable, that--
                  ``(A) as of the last day of the most recently 
                completed fiscal year of the broker or dealer had not 
                less than 1 and not more than 150 associated persons 
                (as that term is defined in section 3(a) of the 
                Securities Exchange Act of 1934 (15 U.S.C. 78c(a))) 
                registered with a self-regulatory organization (as 
                provided in section 3(a)(26) of the Securities Exchange 
                Act (15 U.S.C. 78c(a)(26))) of which the broker or 
                dealer is a member; and
                  ``(B) throughout the most recently completed fiscal 
                year of the broker or dealer--
                          ``(i) did not, as a matter of ordinary 
                        business practice in connection with the 
                        activities of the broker or dealer, receive 
                        customer checks, drafts, or other evidence of 
                        indebtedness made payable to the broker or 
                        dealer;
                          ``(ii) promptly forwarded customer securities 
                        and customer checks, drafts, or other evidence 
                        of indebtedness payable to a third party, 
                        including a clearing broker or dealer, in 
                        compliance with section 240.15c3-3 of title 17, 
                        Code of Federal Regulations, or any successor 
                        regulation;
                          ``(iii) did not otherwise hold customer 
                        securities or cash;
                          ``(iv) if required under section 3(a)(2) of 
                        the Securities Investor Protection Act of 1970 
                        (15 U.S.C. 78ccc(a)(2)), was a member of the 
                        Securities Investor Protection Corporation; and
                          ``(v) either--
                                  ``(I) claimed exemption from section 
                                240.15c3-3 of title 17, Code of Federal 
                                Regulations, or any successor 
                                regulation; or
                                  ``(II) claimed no exemption from such 
                                section 240.15c3-3, or any successor 
                                regulation, or was not otherwise 
                                subject to such, because the broker or 
                                dealer did not maintain custody over 
                                any customer securities or cash.
          ``(7) Privately held.--The term `privately held' means, with 
        respect to a broker or dealer (as those terms are defined in 
        section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 
        78c(a))), that the broker or dealer, as applicable, is not an 
        issuer.''.
  (b) Amendments to Regulations.--Not later than 180 days after the 
date of enactment of this Act, the Securities and Exchange Commission 
shall make any necessary amendments to regulations of the Commission 
that are in effect as of the date of enactment of this Act in order 
to--
          (1) carry out this Act and the amendments made by this Act; 
        and
          (2) to exclude the auditors of non-custody brokers and 
        dealers that are privately held and in good standing (as such 
        terms are defined under section 110 of the Sarbanes-Oxley Act 
        of 2002) from the audit requirements of the Public Company 
        Accounting Oversight Board.
  (c) Effective Date.--This Act, and the amendments made by this Act, 
shall take effect on the date that is 180 days after the date of 
enactment of this Act.

    Amend the title so as to read:
    A bill to amend the Sarbanes-Oxley Act of 2002 to exclude 
the audits of privately held, non-custody brokers and dealers 
that are in good standing from certain requirements under title 
I of that Act, and for other purposes.

                          Purpose and Summary

    Current regulations require all brokers and dealers--
irrespective of whether they are public companies, large or 
small, or take custody of client funds or securities--to hire a 
Public Company Accounting Oversight Board or PCAOB-registered 
audit firm to conduct audits and be subject to the PCAOB's 
registration, inspection, rule-making and enforcement regime. 
To limit the applicability of these regulations, on June 6, 
2018, Representative French Hill introduced H.R. 6021, the 
``Small Business Audit Correction Act of 2018'' to provide a 
narrowly tailored exception for privately-held, small 
noncustodial brokers and dealers in good standing from the 
requirement to hire a PCAOB-registered audit firm in order to 
meet the annual Securities Exchange Act Rule 17a-5 reporting 
obligation.

                  Background and Need for Legislation

    The goal of H.R. 6021 is to eliminate unnecessarily 
burdensome one-size-fits-all PCAOB regulatory requirements that 
have been placed on small, privately-held brokers and dealers 
that do not take custody of client funds or securities.
    Current regulations require all investment brokers and 
dealers to hire a PCAOB-registered audit firm to conduct audits 
using more complex guidelines that were designed--consistent 
with the ``Public Company'' in PCAOB--for larger, public 
companies. PCAOB audit requirements may make sense for public 
companies with shareholders and those brokers and dealers that 
maintain custody over customer funds or securities, as there is 
greater risk to the public markets, but they do not make sense 
for small, privately-held, noncustodial brokers and dealers--
many of whom find it too burdensome to operate under the PCAOB 
regime.
    Title I of the Sarbanes-Oxley Act of 2002 (Pub. L. 107-204) 
created the PCAOB to oversee the audits of U.S. public 
companies in the wake of massive accounting failures at Enron 
and other large companies such as WorldCom, Global Crossing, 
Adelphia, Tyco, and HealthSouth. Following the exposure of the 
Bernie Madoff Ponzi Scheme in late 2008, Subtitle I of Title IX 
of the Dodd-Frank Act, specifically Section 982, expanded the 
PCAOB's jurisdiction to apply to auditors of broker-dealers. 
Although auditors of broker-dealers that also were public 
companies, such as bank subsidiaries, were already subject to 
PCAOB regulation prior to Dodd-Frank; that legislation added 
new requirements for auditors of small- and medium-sized 
brokers and dealers to be subject to the PCAOB's regulatory 
regime. The result of Section 982 of the Dodd-Frank Act is a 
disproportionate and burdensome regulatory obligation imposed 
on small- and medium-sized brokers and dealers and an auditing 
regime that does not properly account for the business model of 
brokers and dealers who are small, privately-held, and 
noncustodial.
    In 2011, the PCAOB implemented an interim inspection 
program to gather information on all broker-dealers to develop 
a permanent audit program. The PCAOB released its first 
progress report in August 2012, noting deficiencies in all 23 
broker-dealer audits it inspected, which were performed under 
AICPA standards rather than those of the PCAOB. Following the 
release of this first report, the Securities and Exchange 
Commission amended Rule 17a-5 to require that audits of broker-
dealers be conducted in accordance with PCAOB, rather than 
AICPA, standards. AICPA standards employ Generally Accepted 
Auditing Standards (GAAP), which are generally accepted 
practice among auditors, whereas PCAOB standards are 
requirements promulgated by a regulator. In addition, the PCAOB 
inspection process is more rigorous than the AICPA peer-review 
process.
    Under this regime, a registered public accounting firm must 
certify financial statements for broker-dealers. The accounting 
firm must cooperate with PCAOB inspection or enforcement 
processes and must comply with PCAOB annual and special 
reporting rules. Additionally, registered public accounting 
firms must follow auditing and attestation, quality control, 
ethics, and independence standards regarding audit reports for 
broker-dealers. For non-public broker-dealers, many of whom do 
not have an audit committee, these new responsibilities to 
understand applicable financial reporting requirements and 
audit standards falls on management to ensure compliance.
    PCAOB audit standards designed and priced for larger public 
companies disproportionately affect privately-held small 
businesses. In 2016, there were 783 PCAOB-registered audit 
firms. But in 2017, there were only 478--a nearly 40% reduction 
in the number of firms eligible to audit public companies and 
the approximately 3,700 broker-dealers around the country. It 
should not be a surprise that with a decreasing number of audit 
firms, smaller broker-dealers are experiencing audit cost 
increases. Small broker-dealers, on average, employ twenty 
people or less and are much smaller organizations as compared 
to the larger, public companies for which the PCAOB developed 
these standards.
    According to a small-firm survey conducted in 2017 by the 
Small Firm Advisory Board of the Financial Institution 
Regulatory Authority (FINRA), the average time spent on audits 
nearly doubled and average audit costs are up sharply for small 
firms in all revenue classes since the full implementation of 
the PCAOB auditing requirements. The survey found that the 
average increase in the cost of annual audits had jumped 83%--a 
jump, on average, from $10,228 to $18,710. If that amount is 
multiplied across the 3,339 small firms that existed as of May 
21, 2018, the cumulative additional cost totals more than $28.3 
million. This is $28.3 million that could be invested into 
technology advancements to protect customer data and 
information, enhancements to the way small firms can better 
serve their customers, and job and capital creation--not to 
mention the staff productivity that could be focused on such 
issues. After all, the total number of man-hours that small 
firms report their staff spending to complete the firm's audit 
almost doubled from 44 hours to 82 hours.
    Opponents of this legislation fallback on two misleading 
headlines. First, they claim that the deficiency rate on 
auditing firms reported in the PCAOB's annual report on its 
Interim Program indicates that the PCAOB audit standards for 
all broker-dealers are important to maintain to ensure 
effective auditing and to protect broker-dealer customers and 
investors. Unfortunately, such an argument stops before 
actually considering the inputs and the regulatory framework at 
issue. In particular, the deficiency rate in the PCAOB's report 
is focused on the work of the auditors and not the reliability 
of the brokers or dealers who shoulder the cost of those 
audits. After all, the PCAOB's job is to make sure auditors are 
performing audits in accordance with PCAOB standards. In other 
words, the deficiencies reported relate to whether certain 
audit principles were followed properly and do not mean that 
the broker-dealers' financial statements or supporting 
materials are materially misstated. To be clear, the PCAOB 
report has been issued for four-years running, and each year 
the PCAOB reports deficiencies of 90+%. Such a four-year trend 
begs the question of why either the PCAOB or SEC have not taken 
action if such a rate truly is harming investors. The most 
logical answer is that those writing the report know themselves 
that the standards do not fit and never will, and they know the 
vast majority of the ``deficiencies''' would not and do not 
affect the overall audit opinion. The findings of the report 
and the absence of any urgency to reduce the deficiency rate 
the past four years actually underscores that deficiencies can 
be expected when you make public company standards one-size-
fits-all and apply them to audits of nonpublic companies, which 
do not present the same risk to investors when they are 
noncustodial and which often traditionally have been done by 
auditors who do not audit public companies.
    Second, opponents also have falsely claimed that H.R. 6021 
will result in a void of oversight of small, privately-held, 
noncustodial broker-dealers. This simply is false, as it 
ignores the fact that PCAOB oversight of these firms is 
duplicative and unnecessary. FINRA and the SEC test for 
compliance with Federal securities laws, Self-Regulatory 
Organization rules, and compliance with the broker-dealers' 
written supervisory procedures. All of these examinations 
already provide protection for customers whose broker-dealers 
are noncustodial. Further, FINRA broker-dealers are examined or 
audited by state securities regulators in the states where they 
are registered, the SEC, the Commodity Futures Trading 
Commission (if the entity is registered with the CFTC), the 
National Futures Association, and the Internal Revenue Service 
for compliance with the Employee Retirement Income Security Act 
of 1974.
    In short, the PCAOB's one-size-fits-all approach is 
inappropriate and unnecessarily burdensome for small, privately 
held noncustodial brokers and dealers--those firms that do not 
take custody of client assets. H.R. 6021 addresses this problem 
by narrowly tailoring a legislative exception for privately-
held, small noncustodial brokers and dealers in good standing 
from the requirement to hire a PCAOB-registered audit firm in 
order to meet the annual SEC Rule 17a-5 reporting obligation.

                                Hearings

    The Committee on Financial Services held no hearings 
examining matters relating to H.R. 6021.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
September 13, 2018, and ordered H.R. 6021 to be reported 
favorably to the House as amended by a recorded vote of 36 yeas 
to 16 nays (recorded vote no. FC-213), a quorum being present. 
An amendment in the nature of a substitute offered by 
Representative Hill was agreed to by voice vote.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. The 
sole recorded vote was on a motion by Chairman Hensarling to 
report the bill favorably to the House as amended. The motion 
was agreed to by a recorded vote of 36 yeas to 16 nays (Record 
vote no. FC-213), a quorum being present.






[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]









                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the Committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 6021 
will reduce the disproportionate regulatory burden on privately 
held, small non-custodial broker-dealer firms by exempting them 
from the requirement to hire a PCAOB-registered audit firm to 
meet certain reporting requirements.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                 Congressional Budget Office Estimates

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                 Washington, DC, November 19, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 6021, the Small 
Business Audit Correction Act of 2018.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Stephen 
Rabent.
            Sincerely,
                                                Keith Hall,
                                                          Director.
    Enclosure.

H.R. 6021--Small Business Audit Correction Act of 2018

    Under current law, securities issuers, brokers, and dealers 
that are registered with the Securities and Exchange Commission 
(SEC) must be audited by an accounting firm that is registered 
with the Public Company Accounting Oversight Board (PCAOB) and 
must follow certain rules and requirements when preparing audit 
reports. H.R. 6021 would exempt from the PCAOB's definition of 
broker or dealer certain privately held brokers or dealers that 
meet other requirements, allowing those brokers or dealers to 
be audited by a firm that is not registered with the PCAOB.
    Using information from the SEC, CBO estimates that 
implementing H.R. 6021 would cost less than $500,000 for the 
agency to amend its rules. However, the SEC is authorized to 
collect fees sufficient to offset its annual appropriation; 
therefore, CBO estimates that the net effect on discretionary 
spending would be negligible, assuming appropriation actions 
consistent with that authority.
    Using information from the PCAOB, CBO estimates that 
implementing H.R. 6021 would increase direct spending by less 
than $500,000 to make changes to PCAOB regulations. However, 
the PCAOB is authorized to assess fees (which are recorded in 
the budget as revenues) to offset its operation costs. 
Therefore, CBO expects that the net effect on the deficit would 
be negligible. Because enacting the bill would affect direct 
spending and revenues, pay-as-you-go procedures apply.
    CBO estimates that enacting H.R. 6021 would not 
significantly increase net direct spending or on-budget 
deficits in any of the four consecutive 10-year periods 
beginning in 2029.
    H.R. 6021 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA).
    If the SEC and the PCAOB increased fees to offset the costs 
associated with implementing the bill, H.R. 6021 would increase 
the cost of an existing mandate on private entities required to 
pay those assessments and fees. CBO estimates that the 
incremental cost of the mandate would be less than $1 million, 
well below the annual threshold for private-sector mandates 
established in UMRA ($160 million in 2018, adjusted annually 
for inflation).
    The CBO staff contacts for this estimate are Stephen Rabent 
(for federal costs) and Rachel Austin (for mandates). The 
estimate was reviewed by H. Samuel Papenfuss, Deputy Assistant 
Director for Budget Analysis.

                       Federal Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995.
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                    Duplication of Federal Programs

    In compliance with clause 3(c)(5) of rule XIII of the Rules 
of the House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program; (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139; or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 
98-169).

                   Disclosure of Directed Rulemaking

    Pursuant to section 3(i) of H. Res. 5, (115th Congress), 
the following statement is made concerning directed rule 
makings: The Committee estimates that the bill requires no 
directed rule makings within the meaning of such section.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section cites H.R. 6021 as the ``Small Business Audit 
Correction Act of 2018''.

Section 2. Exemption

    This section amends the Sarbanes-Oxley Act of 2002 to 
exempt privately-held, non-custodial brokers and dealers in 
good standing from the requirement to hire a PCAOB registered 
audit firm in order to meet the annual Securities Exchange Act 
Rule 17a-5 reporting obligation.

         Changes in Existing Law Made by the Bill, as Reported

    In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, and existing law in which no 
change is proposed is shown in roman):

                       SARBANES-OXLEY ACT OF 2002




           *       *       *       *       *       *       *
TITLE I--PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD

           *       *       *       *       *       *       *


SEC. 110. DEFINITIONS.

     For the purposes of this title, the following definitions 
shall apply:
            (1) Audit.--The term ``audit'' means an examination 
        of the financial statements, reports, documents, 
        procedures, controls, or notices of any issuer, broker, 
        or dealer by an independent public accounting firm in 
        accordance with the rules of the Board or the 
        Commission, for the purpose of expressing an opinion on 
        the financial statements or providing an audit report.
            (2) Audit report.--The term ``audit report'' means 
        a document, report, notice, or other record--
                    (A) prepared following an audit performed 
                for purposes of compliance by an issuer, 
                broker, or dealer with the requirements of the 
                securities laws; and
                    (B) in which a public accounting firm 
                either--
                            (i) sets forth the opinion of that 
                        firm regarding a financial statement, 
                        report, notice, or other document, 
                        procedures, or controls; or
                            (ii) asserts that no such opinion 
                        can be expressed.
            (3) Broker.--The term ``broker'' means a broker (as 
        such term is defined in section 3(a)(4) of the 
        Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4))) 
        that is required to file a balance sheet, income 
        statement, or other financial statement under section 
        17(e)(1)(A) of such Act (15 U.S.C. 78q(e)(1)(A)), where 
        such balance sheet, income statement, or financial 
        statement is required to be certified by a registered 
        public accounting firm, except that the term does not 
        include a non-custody broker or dealer that is 
        privately held and in good standing.
            (4) Dealer.--The term ``dealer'' means a dealer (as 
        such term is defined in section 3(a)(5) of the 
        Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(5))) 
        that is required to file a balance sheet, income 
        statement, or other financial statement under section 
        17(e)(1)(A) of such Act (15 U.S.C. 78q(e)(1)(A)), where 
        such balance sheet, income statement, or financial 
        statement is required to be certified by a registered 
        public accounting firm, except that the term does not 
        include a non-custody broker or dealer that is 
        privately held and in good standing.
            (5) In good standing.--The term ``in good 
        standing'' means, with respect to a broker or dealer 
        (as those terms are defined in section 3(a) of the 
        Securities Exchange Act of 1934 (15 U.S.C. 78c(a))), 
        that, as of the last day of the most recently completed 
        fiscal year of the broker or dealer, as applicable, the 
        broker or dealer--
                    (A) was registered with the Commission;
                    (B) was a member of a registered securities 
                association (as defined under section 15A of 
                the Securities Exchange Act of 1934 (15 U.S.C. 
                78o-3));
                    (C) was compliant with the minimum dollar 
                net capital requirements under section 
                240.15c3-1 of title 17, Code of Federal 
                Regulations, or any successor regulation;
                    (D) had not, during the 10-year period 
                preceding that date, been convicted of a felony 
                under Federal or State law;
                    (E) does not have an associated person (as 
                that term is defined in section 3(a) of the 
                Securities Exchange Act of 1934 (15 U.S.C. 
                78c(a))) who, during the 10-year period 
                preceding that date, was convicted of a felony 
                under Federal or State laws for fraudulent 
                conduct; and
                    (F) was not, as provided by section 
                3(a)(39) of the Securities Exchange Act of 1934 
                (15 U.S.C. 78c(a))--
                            (i) expelled or suspended from 
                        membership or participation in any 
                        self-regulatory organization (as 
                        provided in section 3(a)(26) of the 
                        Securities Exchange Act of 1934 (15 
                        U.S.C. 78c(a)(26))) or a registered 
                        futures association (as provided in 
                        section 17 of the Commodity Exchange 
                        Act (7 U.S.C. 21));
                            (ii) subject to an order of the 
                        Commission, or other appropriate 
                        regulatory agency, denying, suspending, 
                        or revoking its registration as any 
                        regulated entity; or
                            (iii) subject to an order of the 
                        Commodity Futures Trading Commission, 
                        or other appropriate regulatory agency, 
                        denying, suspending, or revoking its 
                        registration under the Commodity 
                        Exchange Act (7 U.S.C. 1 et seq.) or 
                        its authority to engage in any 
                        transactions.
            (6) Non-custody broker or dealer.--The term ``non-
        custody broker or dealer'' means a broker or dealer (as 
        those terms are defined in section 3(a) of the 
        Securities Exchange Act of 1934 (15 U.S.C. 78c(a))), as 
        applicable, that--
                    (A) as of the last day of the most recently 
                completed fiscal year of the broker or dealer 
                had not less than 1 and not more than 150 
                associated persons (as that term is defined in 
                section 3(a) of the Securities Exchange Act of 
                1934 (15 U.S.C. 78c(a))) registered with a 
                self-regulatory organization (as provided in 
                section 3(a)(26) of the Securities Exchange Act 
                (15 U.S.C. 78c(a)(26))) of which the broker or 
                dealer is a member; and
                    (B) throughout the most recently completed 
                fiscal year of the broker or dealer--
                            (i) did not, as a matter of 
                        ordinary business practice in 
                        connection with the activities of the 
                        broker or dealer, receive customer 
                        checks, drafts, or other evidence of 
                        indebtedness made payable to the broker 
                        or dealer;
                            (ii) promptly forwarded customer 
                        securities and customer checks, drafts, 
                        or other evidence of indebtedness 
                        payable to a third party, including a 
                        clearing broker or dealer, in 
                        compliance with section 240.15c3-3 of 
                        title 17, Code of Federal Regulations, 
                        or any successor regulation;
                            (iii) did not otherwise hold 
                        customer securities or cash;
                            (iv) if required under section 
                        3(a)(2) of the Securities Investor 
                        Protection Act of 1970 (15 U.S.C. 
                        78ccc(a)(2)), was a member of the 
                        Securities Investor Protection 
                        Corporation; and
                            (v) either--
                                    (I) claimed exemption from 
                                section 240.15c3-3 of title 17, 
                                Code of Federal Regulations, or 
                                any successor regulation; or
                                    (II) claimed no exemption 
                                from such section 240.15c3-3, 
                                or any successor regulation, or 
                                was not otherwise subject to 
                                such, because the broker or 
                                dealer did not maintain custody 
                                over any customer securities or 
                                cash.
            (7) Privately held.--The term ``privately held'' 
        means, with respect to a broker or dealer (as those 
        terms are defined in section 3(a) of the Securities 
        Exchange Act of 1934 (15 U.S.C. 78c(a))), that the 
        broker or dealer, as applicable, is not an issuer.
            [(5)] (8) Professional standards.--The term 
        ``professional standards'' means--
                    (A) accounting principles that are--
                            (i) established by the standard 
                        setting body described in section 19(b) 
                        of the Securities Act of 1933, as 
                        amended by this Act, or prescribed by 
                        the Commission under section 19(a) of 
                        that Act (15 U.S.C. 17a(s)) or section 
                        13(b) of the Securities Exchange Act of 
                        1934 (15 U.S.C. 78a(m)); and
                            (ii) relevant to audit reports for 
                        particular issuers, brokers, or 
                        dealers, or dealt with in the quality 
                        control system of a particular 
                        registered public accounting firm; and
                    (B) auditing standards, standards for 
                attestation engagements, quality control 
                policies and procedures, ethical and competency 
                standards, and independence standards 
                (including rules implementing title II) that 
                the Board or the Commission determines--
                            (i) relate to the preparation or 
                        issuance of audit reports for issuers, 
                        brokers, or dealers; and
                            (ii) are established or adopted by 
                        the Board under section 103(a), or are 
                        promulgated as rules of the Commission.
            [(6)] (9) Self-regulatory organization.--The term 
        ``self-regulatory organization'' has the same meaning 
        as in section 3(a) of the Securities Exchange Act of 
        1934 (15 U.S.C. 78c(a)).

           *       *       *       *       *       *       *


                             MINORITY VIEWS

    H.R. 6021 would exempt some of the worst-performing 
auditors in our capital markets from federal scrutiny. 
Specifically, the bill would create a permanent statutory 
exemption for audits of certain privately held brokers and 
dealers that do not ordinarily receive and or hold client 
assets (i.e., ``non-custody'' firms) from Public Company 
Accounting Oversight Board (PCAOB) oversight.
    In recognition of the role auditing failures played in 
enabling Bernie Madoff's $65 billion Ponzi scheme, the Dodd-
Frank Act gave the PCAOB oversight authority over the audits of 
all brokers and dealers registered with the SEC. Congress, in 
doing so, charged the PCAOB with the task of setting standards 
for auditors of broker-dealers and ensuring their compliance 
through annual inspections. Far from a ``one-size fits all 
requirement,'' the Dodd-Frank Act gave the PCAOB express 
authority to tailor its inspection program to, ``allow for 
differentiation among classes of brokers and dealers, as 
appropriate.''\1\ Additionally, the Dodd-Frank Act clearly 
aligned PCAOB oversight with the inspection program so that any 
auditor the PCAOB decides to exempt from inspection would not 
be required to register with the PCAOB or adhere to PCAOB 
standards.\2\
---------------------------------------------------------------------------
    \1\See Pub. L. No. 111-203 982(e)(1).
    \2\See 15 U.S.C. Sec. 7214(a)(2)(D) (``. . . a public accounting 
firm shall not be required to register with the Board if the public 
accounting firm is exempt from the inspection program which may be 
established by the Board. . . .'').
---------------------------------------------------------------------------
    Although the PCAOB currently subjects broker-dealers of all 
classes to inspection, the program is in a temporary phase 
designed to inform the PCAOB's determination of how to 
ultimately tailor its permanent inspection program. Despite 
these ongoing fact-finding efforts, H.R. 6021 would statutorily 
exempt audits of certain brokers and dealers from PCAOB 
oversight. The bill is unnecessary as the PCAOB possesses 
express authority to tailor its inspection program through a 
rulemaking process that would (1) take into account the PCAOB's 
unique insight into the performance of broker-dealer auditors 
and (2) be subject to public notice and comment and approval by 
the SEC.
    In addition to being unnecessary, H.R. 6021 is far too 
broad in scope. The bill's exemption applies to broker-dealers 
with up to 150 representatives--a number derived from the 
definition of ``small firm'' included in the by-laws of the 
Financial Industry Regulatory Authority (FINRA), the self-
regulatory organization for the broker-dealer industry. 
However, the number of representatives that a brokerage firm 
employs bears no meaningful relationship to the complexity of 
the firm's finances for auditing purposes. Even limited to non-
custody firms, this threshold accounts for approximately 80% of 
registered broker-dealers.
    Moreover, according to the results of the PCAOB's interim 
inspection program, reduced auditing oversight appears to be 
unwarranted for the very class of broker-dealers that H.R. 6021 
would exempt. The PCAOB has consistently found that auditors of 
non-custody broker-dealers generally have a higher rate of 
deficiencies than other firms. These deficiencies include 
material auditing failures such as inadequate revenue testing 
and overlooking red flags that could indicate fraud. In fact, 
in its fiscal year 2017 inspections, the PCAOB found that 71% 
of audits of non-custody firms had deficiencies related to 
``assessing and responding to risks of material misstatement 
due to fraud.''\3\ By comparison, the same deficiency was 
observed in 50% of audits for custodial brokers and dealers. 
Overall, the PCAOB found deficiencies at 85% of the 54 
inspected auditing firms that only audited non-custody brokers 
and dealers. These results counsel against eliminating 
oversight over the performance of these auditors.
---------------------------------------------------------------------------
    \3\See Annual Report on the Interim Inspection Program Related to 
Audits of Brokers and Dealers, PCAOB Release No. 2018-003 (Aug. 20, 
2018), available at https://pcaobus.org/Inspections/Documents/Broker-
Dealer-Auditor-Inspection-Annual-Report-2018.pdf.
---------------------------------------------------------------------------
    The exemption contemplated by H.R. 6021 is inappropriate 
considering the prevalence of auditing deficiencies among 
auditors of non-custody brokers and dealers. Additionally, the 
bill ignores the fact that auditors represent a primary, 
independent source of verifying how a brokerage firm treats 
client assets. Importantly, FINRA employs a risk-based approach 
to its oversight, pursuant to which it relies, in part, on a 
broker-dealer's audited filings to determine the degree of 
supervision it will apply to a particular firm.
    By eliminating auditing oversight for self-proclaimed non-
custody broker-dealers, H.R. 6021 would erode an important 
accountability mechanism and potentially put investors at risk.
    For these reasons, we oppose H.R. 6021.

                                   Maxine Waters.
                                   Carolyn B. Maloney.
                                   Nydia M. Velazquez.
                                   Wm. Lacy Clay.
                                   Michael E. Capuano.

                                  [all]